Wash. Educ. Ass'n v. Dep't of Ret. Sys. ( 2014 )

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FII:E'.
  
IN CLERICI OPPIOI '
      
This 9,Pinion was fi·led for record
at '6·00 on, . · ·. t.
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
WASHINGTON EDUCATION )
ASSOCIATION; STACIA BILSLAND and ) No. 88546-0
KATHLEEN RANEY, on their own behalf )
and on behalf of all others similarly situated, )
)
Respondents, )
)
v. )
)
WASHINGTON DEPARTMENT OF )
RETIREMENT SYSTEMS; STATE OF )
WASHINGTON, )
)
Petitioners. ) En Bane
WASHINGTON FEDERATION OF STATE )
EMPLOYEES; PAULETTE THOMPSON; )
BOB KELLER, and all others similarly )
situated, )
)
Respondents, )
)
v. )
)
WASHINGTON DEPARTMENT OF ) Filed AUG 1 4 2014
RETIREMENT SYSTEMS; STATE OF )
WASHINGTON, )
)
Petitioners. )
_j
             
No. 88546-0
RETIRED PUBLIC EMPLOYEES COUNCIL )
OF WASHINGTON; and HOWARD N. )
JORGENSON, on his own behalf and on )
behalf of all similarly situated individuals, )
)
Respondents, )
)
v. )
)
WASHINGTON DEPARTMENT OF )
RETIREMENT SYSTEMS; STATE OF )
WASHINGTON, )
)
Petitioners. )
MADSEN, C.J.-The Washington Department of Retirement Services (DRS) and
the State of Washington petition for review of an order granting summary judgment to a
class of public employee unions and unaffiliated employees and holding that the 2011
repeal of legislation granting future uniform cost of living adjustments (UCOLA) to the
respondents' monthly pension payments was an unconstitutional impairment of the
State's contractual obligation with its employees. We disagree because the legislature
reserved its right to repeal the pension rights at issue and the original enactment of
UCOLA did not impair any existing contract rights of state employees. Accordingly we
reverse.
FACTS AND PROCEDURAL HISTORY
The Public Employees' Retirement System (PERS) Plan 1 and the Teachers'
Retirement System (TRS) Plan 1 governed the state's pre-1977 pension program for
school teachers, administrators, and other state employees. Because PERS Plan 1 and
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TRS Plan 1 provide substantially the same benefits, they will together be referred to as
"Plan 1." On October 1, 1977, the legislature eliminated Plan 1 as an option for new
employees, replacing Plan 1 with Plan 2 and later adding Plan 3 as a second option.
Current Plan 1 members therefore all entered state employment before October 1, 1977.
Plan 1 is a defined benefit plan where, after retirement, members are paid a fixed monthly
pension amount irrespective of their level of contribution. A statutory formula
determines Plan 1 members' pension amounts, looking to the members' years of service
and average compensation level during their highest two consecutive years. See RCW
41.32.498; RCW 41.40.185 (outlining that the Plan 1 annual retirement allowance shall
be two percent of the employee's average final compensation for each service credit
year). Plan 1 is contributory; the benefit is paid out of contributions from the employer
and the employee, as well as investment returns on prior contributions. Employee
contribution is capped, whereas the employer contribution level can vary with need and is
set by the legislature biennially. As it originally stood, Plan 1 did not include any
adjustment for changes in cost of living.
As the years progressed, pressure mounted to adjust pensions to reflect greater
retiree longevity and increased inflation. Beginning in the early 1970s, the legislature
enacted a series of cost of living adjustments (COLAs) that were limited to specific
groups and time periods. In 1973, the legislature provided an adjustment based on a cost
of living factor. This COLA stated that an adjustment "shall" be made, "provided, that
the department finds, at its sole discretion" that the system assets could fund the COLA.
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Former RCW 41.32.499 (1994) (capitalization omitted); former RCW 41.40.195 (1994).
Under this scheme, COLAs were never granted to TRS Plan 1 employees and were
granted only through 1980 to PERS Plan 1 employees. Hence, for the 15 years prior to
the creation of a uniform COLA system in 1995, DRS never exercised its discretion to
grant a COLA under the 1973 provision. In subsequent years the legislature enacted
three other COLAs to benefit discrete populations of the state employee community:
minimum retirement allowance recipients, retirees whose benefit had lost a specified
amount of its purchasing power, and retirees who were at least 70 years old. 1
In 1995, motivated by the desire to simplify calculations, expand coverage, and
streamline the administration of COLA benefits, the legislature passed a UCOLA
scheme. LAWS OF 1995, ch. 345, § 1. UCOLA repealed the 1973 COLA and the
purchasing power COLA, and made the age-70 COLA permanent for those already
receiving it. FINAL B. REPORT ON SUBSTITUTE S.B. 5119, 54th Leg., Reg. Sess. (Wash.
1995). UCOLA also replaced the old minimum benefit COLA with a new minimum
1
In 1987, the legislature enacted a COLA for the minimum retirement allowance-a fixed dollar
amount provided to retirees whose pension benefit as otherwise calculated would fall below the
minimum amount. Under this COLA, the minimum retirement allowance increased each year by
the change in the consumer price index (CPI) or three percent, whichever was lower. Former
RCW 41.32.487 (1994); former RCW 41.40.1981 (1994). In 1989, the legislature enacted a
"Plan 1 COLA," whi<;-h provided an annual increase of three percent or inflation (whichever was
less) to any Plan 1 retiree whose benefit lost more than 40 percent of its purchasing power
compared to their benefit at age 65. Former RCW 41.32.575 (1994); former RCW 41.40.325
(1994). Adjustments were tied to the CPl. In 1993, the legislature enacted an "age-70 COLA,"
which granted a one-time increase of three dollars per year of service to retirees who were at
least 70 years old as of July 1, 1993; had been retired for at least five years; and were not already
receiving either the Plan 1 COLA or the minimum retirement allowance. Former RCW
41.32.4871 (1994); former RCW 41.40.1983 (1994).
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allowance of $24.22 per year of service, to be adjusted annually for cost of living in the
same manner as all pensions. RCW 41.32.4851; RCW 41.40.1984.
UCOLA created a monthly increase amount per year of service (annual increase
amount). LAWS OF 1995, ch. 345, §§ 2, 5. At the time ofUCOLA's enactment in 1995,
the annual increase amount was $0.59 per year of service. Former RCW 41.32.010(47)
(1995); former RCW 41.40.010(40) (1995); Br. ofPet'rs' at 8 n.10. 2 Disbursement of
UCOLA benefits was not linked to actual increases in cost of living or inflation; the
annual increase amount accrued automatically each year to eligible Plan 1 retirees. See
former RCW 41.32.489(1) (1995); former RCW 41.40.197(1) (1995). Under UCOLA,
the initial annual increase amount of $0.59 increased by three percent each year so that in
2011, it was set at $1.94 per year of service. Former RCW 41.32.010(47); former RCW
41.40.010(40) (1995); Br. ofPet'rs' at 8 n.10. 3
To prevent a perpetual obligation to increase the COLA amount each year, the
legislature included a clause that reserved its right to modify or repeal the UCOLA
scheme in the future and specified that it was not creating any contract rights. Former
RCW 41.32.489(6); former RCW 41.40.197(6). "The legislature reserves the right to
amend or repeal this section in the future and no member or beneficiary has a contractual
right to receive this postretirement adjustment not granted prior to that time." Former
RCW 41.32.489(6); former RCW 41.40.197(6).
2
For example, in 1995, a retiree with 30 years of experience would receive $17.70 per month
($0.59 times 30) in addition to a basic pension.
3
In 2011, for example, a retiree with 30 years of experience would receive $58.20 per month
($1.94 times 30) in addition to a basic pension.
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In 20 11, responding to the ongoing financial crisis and state actuary reports that
Plan 1 was underfunded, the legislature exercised its reserved right and repealed
UCOLA. LAws OF 2011, ch. 362, § 1 ("The legislature now finds that changing
economic conditions have also made necessary the amendatory provisions contained in
this act."). Because employee contribution to Plan 1 was capped and the legislature was
reluctant to force employers to contribute more, UCOLA was being funded primarily
with current Plan 1 assets. Plan 1 thus became underfunded and the legislature responded
with repeal. Under the terms of the repeal, the annual increase amount will cease
increasing by three percent each year. Instead, it will remain locked at the July 1, 2010
amount per service year. RCW 41.32.489(1); RCW 41.40.197(1). Retirees already
receiving pension payments will not lose the UCOLA amounts that have already been
designated to them but in the future will receive pensions as adjusted on July 1, 2010
rather than the current year. Plan 1 employees who have not yet retired will not receive
any UCOLA adjustments. RCW 41.32.489(1)(b) ("After July 1, 2010, no annual
increase amounts may be provided to any beneficiaries who are not already receiving
benefits under this section."); RCW 41.40.197(1)(b) (same). The legislature excluded the
minimum benefit COLA from the repeal and in fact increased the minimum benefit
amount. RCW 41.32.4851; RCW 41.40.1984. The minimum benefit thus continues to
be adjusted upward each year. The state actuary estimates that the repeal ofUCOLA will
save the state over seven billion dollars over the next 25 years.
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On October 12, 2011, the Washington Education Association and a class ofPlan 1
employees filed a complaint in Thurston County Superior Court challenging the 2011
repeal ofUCOLA. The plaintiffs raised four claims, one of which alleged that the repeal
ofUCOLA was an unconstitutional impairment of the state's contract with its
employees. 4 In Apri12012, the plaintiffs filed a motion for summary judgment on this
contract impairment claim. The trial judge granted summary judgment to the plaintiffs,
reasoning that the repeal was an unconstitutional impairment. The defendants, DRS and
the State, then filed a motion for certification under RAP 2.3(b )(4) and a notice of
discretionary review in this court. The trial court certified a class that includes all Plan 1
members, retired or working, all of whom became state employees prior to October 1,
1977. 5 In June 2013, this court granted the petitioners' motion for discretionary review to
address their contract impairment claim and designated the case for direct review under
RAP 6.2(a) as a companion to the gain-sharing case already pending with the court. 6
4
The other causes of action included violation of due process, equitable and promissory
estoppel, and breach of contract.
5
The class is defined as "[a]ll individuals who are active, retired, or tenninated members of
PERS 1 and TRS 1 who, as of July 1, 2011: (a) have not yet reached age 66 or who have not yet
retired or (b) are retired and are receiving the Uniform COLA or (c) would have been eligible to
receive Uniform COLA payments in 2011 but who have not received Uniform COLA payments
and/or will not receive such payments in the future under the terms of [Substitute H.B. 2021, 62d
Leg., Reg. Sess. (Wash. 2011)]; but excluding individuals receiving the basic or alternative
minimum benefit." Clerk's Papers at 457. Thus, Plan 1 members who qualify for the alternative
minimum benefit are not included in the class.
6
Under the challenged gain-sharing legislation, if the Plan 1 investment return exceeded 10
percent per year over the past four years, the amount above that 10 percent would be "shared"
with Plan 1 retirees via an increase to the UCOLA annual increase amount. Former RCW
41.31.010 (2006); formerRCW 41.31.020 (2006); formerRCW 41.31A.020 (2006). Like
UCOLA, the gain-sharing legislation reserved the right of the legislature to amend or repeal gain
sharing and advised that it was not creating any contractual rights. Fonner RCW 41.31.030
(2006). In 1998, the legislature repealed gain sharing, and a group of employees and unions
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ANALYSIS
Standard of Review
This court reviews summary judgment de novo. Retired Pub. Emps. Council of
Wash. v. Charles, 148 Wn.2d 602, 612, 62 P.3d 470 (2003). This court presumes that
statutes are constitutional as enacted. The challenging party, in this case the respondents,
must establish that "'there is no reasonable doubt that the statute violates the
constitution."' Pierce County v. State, 159 Wn.2d 16, 27, 148 P.3d 1002 (2006) (quoting
Larson v. Seattle Popular Monorail Auth., 156 Wn.2d 752, 757, 131 P.3d 892 (2006)).
Impairment of Public Pension Contracts: The Legal Standard
Article I, section 23 of the Washington Constitution provides that "[n]o bill of
attainder, ex post facto law, or law impairing the obligations of contracts shall ever be
passed." This protection echoes the parallel federal constitutional provision, which
prohibits states from passing "any ... law impairing the obligation of contracts." U.S.
CONST. art. I, § 10. In Washington, the state and federal contracts clauses are given the
same effect. Caritas Servs., Inc. v. Dep't of Soc. & Health Servs., 123 Wn.2d 391, 402,
869 P .2d 28 ( 1994 ). When a private contract is impaired, some deference to the
legislature is warranted. See, e.g., Wash. Fed'n ofState Emps. v. State, 127 Wn.2d 544,
560-61, 901 P.2d 1028 (1995). But when a state impairs its own contract, courts apply
more stringent review. !d. At the same time, this court is hesitant to infer contract rights
from a statute. See, e.g., id. at 561-62; Noah v. State, 112 Wn.2d 841, 843-44, 774 P.2d
challenged the repeal as an unconstitutional impairment of contract. We accepted review and
designated the two cases to be heard together as companions.
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516 (1989). We have recognized that state pension statutes can create enforceable
contract rights. Bakenhus v. City of Seattle, 48 Wn.2d 695, 698-701, 296 P.2d 536(1956).
Bakenhus is considered "our leading statement on the basic legal nature of public
pensions." Leonard v. City of Seattle, 81 Wn.2d 479, 485, 503 P.2d 741 (1972). The
plaintiff in Bakenhus, a police officer who retired in 1950, was entitled to a pension of
$185 per month under the law existing at the time he was hired in 1925. Bakenhus, 48
Wn.2d at 696-97. An amendment to the city pension law in1937 instituted a $125 per
month maximum for pension payments, and the plaintiff sued, alleging that the amended
law was an impairment of his pension contract with the city. !d. at 697. This court ruled
for the plaintiff and held that pensions are "deferred compensation for services rendered"
and therefore create a contract that can be modified only to ensure the continued
flexibility and integrity of the system. !d. at 698, 701. Modifications that have an
adverse effect on employees must be accompanied by '"comparable new advantages."'
!d. at 702 (quoting Allen v. City of Long Beach, 45 Cal. 2d 128, 131,287 P.2d 765(1955)). The court noted that "[a]pproximately one third of the anticipated pension has
been removed with no corresponding benefit, and no showing by the appellants that the
reduction was necessary to preserve and perfect the system, nor that it bore any
reasonable relation to the purposes of the pension plan." !d. at 703. The Bakenhus
principles have historically defined the analysis for impairment of public pension
contracts in this state.
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Independently of the Bakenhus line of pension cases, this court developed an
analysis for impairment of other public contracts. Originating in Carlstrom v. State, 103
Wn.2d 391, 394-99, 694 P.2d 1 (1985), this test provides that legislation will
unconstitutionally impair a public contract only if it substantially impairs an existing
contractual relationship and is not reasonable and necessary to serve a legitimate public
purpose. Subsequent cases have divided the test into three distinct parts: (1) whether a
contractual relationship exists; (2) whether the legislation substantially impairs the
contractual relationship; and (3) ifthere is substantial impairment, whether the
impairment is reasonable and necessary to serve a legitimate public purpose. Charles,
148 Wn.2d at 624; Tyrpak v. Daniels, 124 Wn.2d 146, 152, 874 P.2d 1374 (1994).
The State argues, and we agree, that the Carlstrom public contract test applies
with equal force to public pension contracts. The Carlstrom test governs the impairment
of public contracts, of which pension statutes like UCOLA are one category. E.g., Wash.
Fed'n, 127 Wn.2d at 561; Caritas, 123 Wn.2d at 402-03; Carlstrom, 103 Wn.2d at 394-
98. Although the Bakenhus and Carlstrom lines have developed separately, the
Carlstrom public contract test in reality forms the backbone of the analysis in pension
cases. We intimated this result in Charles, 148 Wn.2d at 624, where we applied the
Carlstrom test to a public pension contract. We now make explicit what was implicit in
Charles: when analyzing whether a law impairs public pension contracts we will apply
the same three-part test governing all public contracts. Within this overarching
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framework, the Bakenhus requirements of flexibility, integrity, and comparable new
advantages focus the Carlstrom test in the specific context of public pension rights.
Application: No Impairment of Contract
The respondents frame their argument as a challenge to the 2011 repeal of
UCOLA. They contend that the original enactment ofUCOLA in 1995 did not impair
existing contract rights because UCOLA could have been left in place or been repealed in
a constitutional manner. Resp'ts' Answer to Pet'rs' Suppl. Br. at 2-3. The impairment of
employees' contract rights, they argue, did not occur until 2011 when the legislature
repealed UCOLA without complying with the dictates of Bakenhus. Id. We reject this
argument.
Even assuming that the 2011 repeal legislation affected an existing contractual
relationship, satisfying the first part of the Carlstrom test, the repeal legislation did not
substantially impair the contractual relationship as reflected in the 1995 UCOLA statute.
Indeed, the authority to repeal the UCOLA was contained in the 1995 UCOLA
legislation. Merely acting upon that authority did not alter any contract that was formed
by the 1995 UCOLA legislation. Moreover, the respondents' argument is circular.
Striking down the repeal legislation would reinstate the 1995 UCOLA statute, which
includes a provision expressly reserving the right to repeal. The respondents' contract
rights are defined by the language of the statute creating those rights. Here, that language
includes a right to amend or repeal. If the respondents' contract rights were violated,
they were violated by the enactment ofUCOLA or by including a reservation of rights
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provision in that legislation. The 2011 repeal merely executed a provision of the
established contract.
The respondents make two additional points to support their argument. First, they
assert that UCOLA's reservation language is unenforceable. Br. ofResp'ts at 30-39.
Alternatively, they argue that the 1995 enactment ofUCOLA impaired their contract
rights by repealing the 1973 COLA without providing comparable new advantages.
Resp'ts' Answer to Pet'rs' Suppl. Br. at 3-4. Neither of these arguments establishes an
impairment of the pension contract.
Turning first to the reservation clause, no Washington court has held such a clause
unenforceable in a public pension statute and the respondents' statements otherwise are
incorrect. The respondents rely on Jacoby v. Grays Harbor Chair & Manufacturing Co.,
77 Wn.2d 911, 468 P.2d 666 (1970), where this court, in dicta, did suggest that an
employer's reservation of the right to amend or terminate a pension plan cannot defeat
contractual rights created under that plan. However, the reservation clause in Jacoby was
different in kind than that contained in the UCOLA statute. In Jacoby, the reservation
clause appeared in a contract between a private employer and an assurance company
where the employer agreed to deposit money with the company and the company agreed
to purchase annuities to fund the employees' pensions as they became payable. !d. at
912. The Jacoby employees' pension contract did not mention such a reservation and
this court suggested that a reservation in the contract between the employer and the
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assurance company could not modify the employment contract between the employer
and the employees. Id. at 916.
In contrast to Jacoby, the UCOLA reservation clause existed as an express
provision of the statute that created the claimed pension right. Furthermore, even the
respondents recognize that Jacoby's comments regarding the enforceability of reservation
clauses were dicta. Id.; Br. ofResp'ts at 32 ("The following language, although dicta,
was relied on in Navlet[ v. Port of Seattle, 164 Wn.2d 818, 194 P.3d 221 (2008)] and is
applicable here."). In Jacoby, this court ultimately held that the employee plaintiff was
not eligible for a pension because the contract unambiguously limited application to
employees who had been working for at least 10 years after the plan was implemented.
77 Wn.2d at 917. The court did not need to reach the reservation clause because the
contract expressly excluded the plaintiff from the pension plan. !d.
The respondents also rely on Navlet. In Navlet this court did rely on Jacoby to
strike a reservation clause contained in materials accompanying a collective bargaining
agreement (CBA) provision for welfare benefits. There, when the CBA expired, the
employer ceased contributing to his employees' welfare benefits trust as had been
outlined in the CBA. Navlet, 164 Wn.2d at 824-27. The trust agreement and summary
that accompanied the CBA reserved the right of the employer to amend or repeal the
welfare benefits program and this court held such a reservation unenforceable. Id. at 848-
49. However, the court recognized that the reservation clause would have been
enforceable if it had been placed "in the CBA itself' instead of in the accompanying
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documents. Id. at 849. Here, the reservation clause is part of the UCOLA statute which,
like the CBA in Navlet, is the source of the employees' claimed contractual right. The
Navlet analysis does not support the respondents' claim that a reservation clause cannot
be given effect when it is contained in the statute creating the benefit.
Rules of statutory construction demand enforceability of the reservation clause.
Plan 1 members are bound by the terms of their employment contract. See Jacoby, 77
Wn.2d at 916 ("Where a private pension plan creates a contractual obligation between
employer and employee, the rights and obligations of the parties must be measured by the
terms of the contract under the ordinary rules of contractual construction."); see also
Densley v. Dep 't of Ret. Sys., 162 Wn.2d 210, 219, 173 P.3d 885 (2007) (stating that
"where 'a statute is clear on its face, its meaning [should] be derived from the language
of the statute alone"' (alteration in original) (quoting Kilian v. Atkinson, 147 Wn.2d 16,
50 P.3d 638 (2002)). The ordinary rules of construction link the enforceability of
reservation clauses to the degree of specificity contained in the clause. See, e.g., Wash.
Fed'n, 127 Wn.2d at 563 ("To be effective as a reservation of powers clause, the
language must specifically and explicitly mention future retroactive modification of
preexisting or already performed contracts."); Caritas, 123 Wn.2d at 406-07 (holding a
reservation clause unenforceable and reasoning that "our case law requires such
reservation clauses to be made explicitly contingent on future acts of the Legislature with
retroactive effect"); Carlstrom, 103 Wn.2d at 398 (holding a reservation clause
unenforceable because it was not specific enough and reasoning that "[t]he Legislature
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No. 88546-0
knows how to use plain English to make existing contracts subject to future
modification"). Here, the legislature could not have been more explicit in reserving the
power to amend the UCOLA statute and disclaiming any grant of contractual rights. The
legislature's inclusion ofthe reservation clause in the 1995 UCOLA statute therefore
does not violate any vested rights of the Plan 1 employees.
The nature of the UCOLA benefit also supports the enforceability of the
legislature's right to repeal this benefit. Employees do not contribute to the UCOLA and
the adjustment provided is not "pay withheld to induce continued faithful service" in the
same way that a basic pension plan is. Jacoby, 77 Wn.2d at 915; see also Bakenhus, 48
Wn.2d at 700 (quoting Giannettino v. McGoldrick, 295 N.Y. 208, 66 N.E.2d 57, 59
(1946)). This is particularly true of members who retired prior to UCOLA's enactment in
1995. Whereas a basic pension plan is deferred compensation and induces long and
faithful service over time, a COLA merely enhances the value of the basic pension
payment by adjusting for inflation and cost of living increases. Surely the legislature can
make the addition of such a bonus subject to its right to amend or repeal the program in
the future. To say otherwise would strongly disincentivize the legislature from providing
additional benefits beyond a basic pension. Although the UCOLA relates to the basic
pension plan, it differs significantly from the deferred and compensatory basic pension
that was at issue in Bakenhus.
The respondents' alternative argument that rights created under the 1995 UCOLA
constitute an impairment because UCOLA repealed the 1973 COLA statute without
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providing comparable new advantages also fails. As a preliminary matter, the majority of
the respondents' class is time barred from bringing this claim. It is well settled that
retirees are subject to a three-year statute of limitations for actions alleging a breach of
pension contracts. See, e.g., Bowles v. Dep 't of Ret. Sys., 121 Wn.2d 52, 79-80, 84 7 P .2d
440 (1993); Noah, 112 Wn.2d at 842-43. As the respondents recognize, this three-year
clock begins to run at the time of retirement. Resp'ts' Answer to Pet'rs' Suppl. Br. at 8-
11; see also Bowles, 121 Wn.2d at 79-80; Noah, 112 Wn.2d at 842-43. Yet 60 percent of
class members have already retired and thus are time barred unless they retired fewer
than three years before the time of suit. See Resp'ts' Answer to Pet'rs' Suppl. Br. at 7-8.
Only the approximately 40 percent of the class who has not yet retired has standing to
raise this argument. Though this 40 percent of employed class members is not time
barred, their challenge fails on substantive grounds under the Carlstrom public contract
test as informed by Bakenhus.
The first prong of the Carlstrom test considers whether a contract exists.
Arguably the 1973 COLA did not create a contract because the rights it formed were
illusory. Disbursement of COLA benefits under the 1973 COLA was subject to DRS's
discretionary finding that Plan 1 was adequately funded and could support such a benefit
payout. The respondents contend that the 1973 COLA provided a concrete benefit
because it required DRS to consider the system's capacity to fund a COLA each year.
Yet the 1973 statute made the ultimate decision subject to DRS's discretion, which in
practice DRS rarely chose to exercise. Indeed, for the 15 years leading up to the
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enactment ofUCOLA, DRS never once found the requisite funding to support a COLA
under the 1973 Act. In statutory language and in practice, the 1973 COLA did not
provide employees with any concrete pension benefits and therefore did not become part
of their employment contract with the State.
Even if we agreed with the respondents that the 1973 COLA created a contract
right to annual legislative consideration of the feasibility of granting a COLA, the
respondents' claim fails the second prong of the Carlstrom analysis. If a contract right
exists, the second prong considers whether the challenged legislation has substantially
impaired that contract right. We hold that in public pension cases, substantial impairment
is measured by the implied consent and comparable new advantages analysis established
by Bakenhus and its progeny. Bakenhus itself held that where modifications to pension
rights were disadvantageous to employees, there would be no contract impairment so
long as those disadvantageous modifications were accompanied by comparable new
advantages. 48 Wn.2d at 701~03. Because the amount ofBakenhus's pension had been
reduced without any "corresponding benefit," this court found contract impairment. !d.
at 703 (emphasis omitted). Subsequent cases have phrased this comparable new
advantages requirement as one of implied consent. For example, in Washington
Federation of State Employees v. State, we held:
The rule announced [in Bakenhus] stands for the proposition that pension
rights are contractual rights which vest at the beginning of the employment
relationship. The State cannot alter that contract without mutual consent.
Where the change is favorable to the employee, consent will be implied.
Conversely, where the change is disadvantageous, consent will be
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presumed not to have been given unless the change is made concurrently
with an added benefit.
98 Wn.2d 677, 686, 658 P.2d 634 (1983) (citations omitted); see also Vallet v. City of
Seattle, 77 Wn.2d 12,21-22, 459 P.2d 407 (1969) (affirming that '"an act of the
legislature, making a change in pension rights, will be weighed against pre-existing rights
in each individual case to determine whether it is reasonable and equitable. If the over-all
result is reasonable and equitable, the employees (prospective pensioners) will be
presumed to have acquiesced in the modifications."' (quoting Dailey v. City of Seattle, 54
Wn.2d 733, 738, 344 P.2d 718 (1959)); Dailey, 54 Wn.2d at 739, 740-42 (reasoning that
"the acquiescence of the employees concerned is to be presumed where some advantages
have been sacrificed to gain compensating or greater benefits"). All this is to say that a
modification of a pension contract will not substantially impair an existing contract if the
overall result of the change is favorable to employees. Whether an alteration is favorable
to employees is a fact-specific question that must be measured by the totality of the
circumstances.
Applying this analysis to the 1995 enactment of UCOLA, it is clear that the Plan 1
employees received comparable new advantages under the 1995 UCOLA program. At
the time class members began working prior to 1977, their employment contract did not
include any automatic COLA adjustment. Employees who started after 1973 obtained
the possibility of an ad hoc COLA, but the 1973 COLA was different in kind from the
UCOLA because it was explicitly discretionary and was contingent on the availability of
adequate funding. In both statutory language and fact, the UCOLA system of annual
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COLA adjustments represented a substantial improvement over the 1973 COLA.
Notwithstanding its reservation clause, UCOLA provided a guaranteed right to an annual
COLA of increasing amounts for as long as the program remained in effect. In contrast,
the 1973 COLA did not provide any certain COLA benefits, but merely assured
employees that the DRS would consider whether a COLA was practicable based on
current funding levels. DRS rarely found adequate funding and granted a COLA,
whereas retired Plan 1 members received yearly COLAs of steadily increasing amounts
throughout the years that UCOLA was in effect. Although the UCOLA statute reserved
the legislature's right to change or terminate the program, such reservation clauses are
enforceable and even the creation of an undefined automated COLA system constitutes
an added favorable benefit to the existing Plan 1 pension rights. When the legislature
implemented the UCOLA scheme in 1995, it created a favorable modification to the Plan
1 employees' pension contract. We reject the respondents' argument that the 1995
UCOLA substantially impaired class members' rights by eliminating the 1973 COLA.
CONCLUSION
We hold that the Carlstrom three-prong test for impairment of public contracts
applies to public pension contract impairment. However, the Bakenhus line of cases
remains relevant and strongly informs our application of the Carlstrom test in public
pension cases. In this case, neither the 1995 enactment ofUCOLA nor its 2011 repeal
unconstitutionally impaired the respondents' contract rights. UCOLA's reservation
clause is enforceable and UCOLA's replacement of the 1973 COLA did not impair any
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existing contract rights. We reverse the trial court's grant of summary judgment and
remand for proceedings consistent with this opinion.
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WE CONCUR:
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